Fannie Mae and Freddie Mac have $205B of uninsured earthquake risk

Unlike almost all other natural disasters such as floods, fires and tornadoes, the overwhelming majority of earthquake risk in the United States is completely uninsured. Even in California, the most at-risk state in the country for earthquakes, only 13.3% of residents maintain coverage for earthquake damage.

Researchers at R Street explain that the primary cause of this disparity is that earthquake coverage is not required to secure the collateral of mortgages owned or guaranteed by government-sponsored enterprises (GSEs).

These GSEs are Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corporation), which account for 21% and 12% respectively, of the $14.99 trillion U.S. mortgage debt outstanding.

Currently, the Treasury owns $200 billion of the GSEs’ senior preferred stock.

Related: It’s time to talk to your insureds about earthquake coverage

R.J. Lehmann, R Street’s senior fellow and director of finance, insurance and trade policy, and Daniel Semelsberger, a policy analyst, sought to quantify the size of that uninsured liability. Through their research, these analysts say their intention was also to propose a means to transfer these implicit taxpayer guarantees to the private sector.

In their newly released policy paper, “Take a Load Off Fannie: The GSEs and Uninsured Earthquake Risk,” the team announced a major conclusion that Fannie Mae and Freddie Mac have $205 billion of uninsured earthquake risk on their books.

Earthquakes are among the most devastating natural disasters, both physically and economically. If a major event were to occur with this much uninsured risk on the books, the consequences would be devastating for taxpayers.

Who pays? Taxpayers, of course…

In their report, Lehmann and Semelsberger make a plea to Washington as a major earthquake event is more a question of when, not if.

When tragedy inevitably does strike, with $205 billion of uninsured risk on the books, Fannie Mae and Freddie Mac both would see the destruction of billions of dollars worth of structures that serve as collateral for their mortgage portfolios and mortgage guarantees. The low enrollment of earthquake insurance would ultimately result in major personal losses and reconstruction costs for victims receiving a disproportionate and likely inadequate amount of state and federal disaster relief.

Related: San Francisco earthquake could affect 1.1M homes, cause $170B in damage

Identifying problems — and solutions

The Federal Housing Finance Agency (FHFA) does not currently track the GSEs’ exposure to uninsured earthquake risk.

In their paper, Lehmann and Semelsberger state their intent was to quantify the size of that uninsured liability, and to propose a way to transfer these “implicit taxpayer guarantees” to the private sector.

Their report details three components to accomplish this:

• Using seismic maps published by the U.S. Geological Survey, we identify 249 counties across 21 states that are substantially exposed to the largest earthquake risks.
• Using property-level databases published by the FHFA, we find that, as of 2016, the GSEs held $355.71 billion of unpaid principal for mortgages in those 249 counties, including $210.1 billion held by Fannie Mae and $145.61 billion held by Freddie Mac.
• Making certain base assumptions about the proportion of principal that is attributable to structural value and regional surveys of earthquake insurance takeup, we estimate the total value of uninsured earthquake-exposed collateral held by the GSEs, as of 2016, is $204.68 billion.

Lastly, Lehmann and Semelsberger propose that Congress move immediately to require a report on risk transfer by the GSEs, and detail how to accomplish this further in their full 10-page report.

To access “Take a Load Off Fannie: The GSEs and Uninsured Earthquake Risk” in its entirety, visit R Street’s website.

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